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Borrowing for a big purchase
Tip 1: Make. Every. Payment.
Late payments can stay on your record for up to seven years. But if you always make at least the minimum payments on your loans on time, you’ll have an excellent payment history, which is one of the most important factors used to determine your credit score.
Tip 2: Diversification is key.
Responsibly managing different types of credit over time can help demonstrate your creditworthiness; having a mix of revolving credit accounts (like a credit card) and installment credit accounts (which are typically one-time, lump sum loans, like an auto loan) on your credit history generally helps your credit score in the long run.
Tip 3: Limit your use of available credit.
Your credit utilization ratio represents how much of your available credit you’re using. For example, if you have a $1,000 balance on a credit card with a limit of $10,000, then your credit utilization ratio for that account is 10%.
Generally, keeping your utilization rate low is better for your score. Using no more than 30% of your available credit is recommended—and if you're striving for an excellent score, aim for 10% utilization or lower. Requesting and being approved for a credit limit increase is one way to quickly improve your utilization score. Keep in mind, some card issuers will conduct a full credit check when you request a limit increase. This would count as a hard inquiry, which could temporarily lower your credit score.
Tip 4: Monitor your credit report often.
You can get a free copy of your credit report every year from each of the major credit bureaus (Experian, Equifax, and TransUnion) through AnnualCreditReport.com. If you find any errors or discrepancies in your report, contact the credit bureau as soon as possible to correct the inaccurate information.
Tip 5: Age matters.
The average age of your credit accounts makes up about 15% of your score. So even if you don't use your very first credit card very often, closing your oldest account may negatively impact your credit score. The longer you keep each of your credit accounts open and in good standing, the higher the average age of your accounts. Keep in mind that some card issuers may close inactive accounts after a period of time ranging from a few months to a year or more. If you have a credit card that you rarely use, using it to pay a monthly bill (and paying it off right away) is a good way to help keep that account open and in good standing.
Tip 6: Reduce outstanding debt.
Even though you need to take on some debt to build your credit history in the first place, decreasing your outstanding debt is one of the surefire ways to build your credit score—especially if it’s on a revolving account, like a credit card. A solid debt payoff plan can help you achieve this.
Tip 7: Use caution when applying for new accounts.
Yes, getting a new credit card or loan can help establish your credit history. And yes, paying off balances can help your credit score. But think carefully and strategically when applying for a new account. Having too many credit cards can lead to overspending and high debt, which can negatively impact your credit score. And too many credit applications in a short time frame can also lower your score.
A good credit score can be important. Following these seven credit score best practices can be a great plan to help establish or raise your number.
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